Why OPEC+ Is Considering A Production Cut

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  • OPEC+ is set to make a production cut decision this week, with reports suggesting it could be a one million barrel per day reduction.
  • Saudi Arabia is reportedly on board with the cut because it is eager to protect its spare capacity in the long term.
  • While OPEC used to claim to be happy with oil prices at between $60 and $70, a combination of factors means the cartel has moved that target higher.

Last week, rumors began circulating that OPEC+ was considering a production cut amid a substantial decline in oil prices over the last three months.

Initially, reports said that the idea about a production cut had come from Russia, and it was for a cut of a million barrels daily in output. Later, the usual unnamed sources from the cartel came, who said OPEC+ was prepared to make an even deeper cut.

Some have dismissed the talk about a deep OPEC+ production cut. After all, OPEC alone has been falling short of its own production targets by more than 1 million barrels daily for months already. Russia’s oil production is already down by more than 1 million bpd, too, according to production data.

In this context, the upcoming and any subsequent production cuts would be nothing more than bringing targets in line with production capacity. From another perspective, the upcoming and any subsequent cuts would cement OPEC+’s place as the ultimate swing oil producer and, of course, lead to a price rise.

One might reasonably wonder why OPEC+ would push for higher prices since current prices are above what the cartel used to say just a couple of years ago was its sweet spot: between $60 and $70 per barrel.

Inflation is one reason. It has become ubiquitous, so the sweet spot of the past is not necessarily the sweet spot of the future. But there is a bigger reason: spare capacity.

In one report about the upcoming OPEC+ meeting where the deep cuts will be discussed, the Financial Times quoted sources close to Saudi Arabia, who said the Kingdom was in favor of a production cut because this would allow it to keep its spare capacity spare for longer. The reason, according to the sources, is in case Russia’s production takes a dive next year, and it needs to step in and replace the lost supply.

If those reasons are true, these and any future OPEC+ cuts begin to look like a more significant tactical shift. In August, OPEC+ was 3.6 million bpd below its production target, up from a 2.9-million-bpd shortfall a month earlier, after in June OPEC+ production rose by 490,000 bpd. In June, the extended cartel also missed targets.

In September, output rose to the highest level since 2020, according to a Reuters poll, although it still missed its targets. Interestingly, one of the leaders in production gains last month was one of the chronic underperformers: Nigeria. Another leader was Libya, which is not bound by the OPEC+ production quotas because of its difficult political situation, which makes the security of oil supply virtually non-existent.

Countries such as Nigeria and Iraq would hardly be happy about a deep production cut. Both countries would very much like to expand their production and exports of crude. But as has often happened in the past, the argument that lower production would lead to higher prices might win hearts and minds at the next OPEC+ meeting. And the one after it and the one after that one.

Western governments have, in past months, struggled to make sense of a situation that they have never before encountered. Energy security is suddenly non-existent, prices are through the roof, and there is a scarcity of supply sources to choose from.

OPEC+, meanwhile, has been tightening its grip on oil markets, despite its underperformance and despite its limited spare capacity. Or maybe because of those two factors.

Now, Saudi Arabia’s argument for keeping its spare capacity untapped is a strong one. Russia was, until this year, the world’s largest exporter of crude oil and fuels, taken together. With exports falling victim to sanctions and moratoria, it was always going to be a matter of time before a supply squeeze occurred, with diesel markets looking particularly susceptible.

If Riyadh’s expectation about a drop in Russian oil production materializes, there will be a supply gap to fill, and that will probably require tapping spare capacity. Ultimately, that will reduce global spare capacity and have some negative effects in the long term.

Even if Russian production doesn’t drop as much as feared, an ongoing switch from gas to oil in power generation because of gas prices is driving higher oil demand. Recession fears are certainly something worth worrying about, especially when a recession is now virtually a certainty for Europe.

Yet people and businesses consume electricity even during a recession, and the demand destruction might be milder than expected and OPEC could then relax any cuts in the future.

As always, the cartel will have to keep its finger on the market pulse, but it also needs to protect its spare capacity for the long-term health of the market.

NB: Irina Slav wrote this article for Oilprice.com

Irina Slav
Irina Slav
Hamilton Nwosa is an experienced, and committed communication, business, administrative, data and research specialist . His deep knowledge of the intersection between communication, business, data, and journalism are quite profound. His passion for professional excellence remains the guiding principle of his work, and in the course of his career spanning sectors such as administration, tourism, business management, communication and journalism, Hamilton has won key awards. He is a delightful writer, researcher and data analyst. He loves team-work, problem-solving, organizational management, communication strategy, and enjoys travelling. He can be reached at: hamilton_68@yahoo.com

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